It is important to research thoroughly before one invests their hard-earned money into a financial product. This is especially more relevant for a product that one is investing in for the long term, perhaps even a lifetime. Life insurance products come under such a category since they offer a life insurance cover that will last your lifetime, and an opportunity to invest in financial instruments as well. Choosing the right ULIP not only allows you a deeper peace of mind and security as a result of the life cover but also the chance to enjoy great monetary returns to help meet your life goals.
Therefore, to help you in the process, here’s a 4-point checklist that you must keep in mind before you go ahead with a ULIP.
First, let’s understand the workings of ULIPs.
How does a ULIP plan work?
Your ULIP premiums are divided broadly into three uses: the mortality charge or the life cover, the investment amount, and the other charges. The mortality charge helps you relieve your worries about the financial requirements of your loved ones when you are longer around. The investment portion is pooled along with the money from other policyholders and invested into the funds that you had specifically selected. The funds perform as per market conditions if you have invested in equities and on interest rate fluctuations if you have invested in debt funds.
4 important things to consider before buying ULIP plans
Your risk appetite
As mentioned earlier, one can invest in equity funds or debt funds as per their choice. A beginner investor may think that since equity funds lead to higher returns, they would be the best choice. However, equity funds are also prone to high risks since they depend on market performance. If the market is going through a low, your funds are going to get affected equally. Hence, if you are not comfortable with such volatility, then debt funds would be a better option since they incur lower risks.
But note that ULIPs allow you to switch funds from equity to debt as per your needs. However, there might be certain limitations to that feature. So, it is ideal to opt for a type of ULIP that meets your risk appetite.
The past performance and estimated benefits of the ULIP
Insurance companies are legally obligated to provide a policyholder with benefit illustrations as per the mandates of the IRDAI. These illustrations carry information related to the estimated returns on your investment. Along with a judgement of this illustration, you should also research the ULIP’s past fund performance. With the help of these, you can get a stronger sense of how well your money is going to perform and how much you should invest to enjoy maximum rewards. You can also get an idea of the same with the help of ULIP calculator returns.
The charges associated with the ULIP plan
As compared to other life insurance products, a ULIP may have more charges due to its complex nature. There may be charges such as:
- Fund management charge – Deducted from the NAV of your fund unit to compensate for managing your funds
- Premium redirection fund – Levied by some insurers if you choose to direct your funds to other options in the near future
- Premium allocation charges – Levied by the insurer to cover the underwriting costs, medical test expenses, agent’s commission, etc.
Other charges, such as fund switching charges, partial withdrawal charges, and so on, may also apply. However, these differ from insurer to insurer. Ensure to pick the insurer that has fewer charges.
The types of premium payment options
ULIPs have usually three types of premium payment options – single premium, limited premium, and regular premium. A ULIP return calculator can also help you make a choice between the three.
In the single premium option, you pay the entire premium at once, in a lump-sum amount. In the limited premium option, you have to pay premiums for a particular period of time, let’s say, 5 years or 10 years only. In regular premiums, you pay small amounts over the duration of the policy. Before you go ahead with a ULIP, you should check that it offers multiple premium payment options. Then, you should go with the option that suits your budget, needs, and tax strategy the best.
If you ensure to check these 4 things to consider before buying ULIP plans, the process to select the right ULIP plan will become much easier.